Returns Are Gaining Momentum At Xin Yuan Enterprises Group (HKG:1748)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Xin Yuan Enterprises Group's (HKG:1748) returns on capital, so let's have a look.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Xin Yuan Enterprises Group is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.073 = US$13m ÷ (US$188m - US$16m) (Based on the trailing twelve months to December 2023).

Therefore, Xin Yuan Enterprises Group has an ROCE of 7.3%. Even though it's in line with the industry average of 6.6%, it's still a low return by itself.

View our latest analysis for Xin Yuan Enterprises Group

Historical performance is a great place to start when researching a stock so above you can see the gauge for Xin Yuan Enterprises Group's ROCE against it's prior returns. If you'd like to look at how Xin Yuan Enterprises Group has performed in the past in other metrics, you can view this free graph of Xin Yuan Enterprises Group's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Xin Yuan Enterprises Group has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 113% over the last five years. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

In Conclusion...

In summary, we're delighted to see that Xin Yuan Enterprises Group has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a staggering 224% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

While Xin Yuan Enterprises Group looks impressive, no company is worth an infinite price. The intrinsic value infographic for 1748 helps visualize whether it is currently trading for a fair price.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.